Cyient Q4 FY 2016 Results Conference Call. April 21, 2016

Transcription

1 Cyient Q4 FY 2016 Results Conference Call ANALYST: MR. SANDIP AGARWAL EDELWEISS SECURITIES LIMITED MANAGEMENT: MR. BVR MOHAN REDDY EXECUTIVE CHAIRMAN CYIENT LIMITED MR. AJAY AGGARWAL CHIEF FINANCIAL OFFICER CYIENT LIMITED MR. KRISHNA BODANAPU MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER CYIENT LIMITED MR. ANAND PARAMESWARAN SENIOR VICE PRESIDENT OF HR AND BUSINESS EXCELLENCE CYIENT LIMITED Page 1 of 22

2 Moderator: Ladies and gentlemen, good day and welcome to the Cyient Q4 FY 2016 results conference call hosted by Edelweiss Securities Limited. As a reminder, all participants lines will be in the listenonly mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing * then 0 on your touchtone phone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Sandip Agarwal from Edelweiss Securities. Thank you and over to you Sir! Sandip Agarwal: Thanks Lizann. Good evening to everyone. On behalf of Edelweiss let me welcome you to the Cyient Q4 FY 2016 earnings call. We have with us the senior management of Cyient headed by Mr. BVR Mohan Reddy along with senior members of the management team. Without further ado I will hand over the call to Mr. Ajay Agarwal to start the proceedings. Thanks and over to you Ajay. Thank you Sandip. Good day to all. Welcome to Cyient Limited earnings call for fourth quarter of financial year 2016 ending March 31, This is Ajay Agarwal, CFO. Present with me on this call is our Executive Chairman Mr. BVR Mohan Reddy. Krishna Bodanapu is here our Managing Director and Chief Executive Officer. Also with me is Anand Parameswaran our Senior Vice President of HR and Business Excellence. Before we begin I would like to mention that some of the statements made in today s discussion may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available in our investor update which has been ed to you and is also posted in our corporate website. This call will be accompanied with an earnings call presentation as usual. We will also talk about the full year. We will also talk about the outlook for the next year. Details of the same have already been shared with you. I now would like to invite our Executive Chairman Dr. BVR Mohan Reddy to provide a brief overview of the company s performance for the quarter ended March 31, 2016 and for the financial year BVR Mohan Reddy: Thank you Ajay. Good evening ladies and gentlemen. I welcome you all to this conference call. Financial year 2016 was a challenging year for Cyient. The core business of the company consisting of the Engineering and DNO operations was flat. Margin in these businesses increased during the course of the year by about 100 basis points. In addition to revenue growth in the core business, we faced significant headwinds in some of the investments we made. While Softential which will now be called Service Management Assurance or SMA is performing well from an integration perspective. We had a challenge of course in software sales in Q4. This is reflected as a challenge in revenue growth and profitability. In Rangsons, which will now be called as DLM which is Design Led Manufacturing, we face significant headwinds with the cyclicality of the business. While the backlog is in line with expectations, the execution of backlog has moved significantly. We had consistent a Q-o-Q growth, but the revenue for the year was lower than what we originally committed. As a result of these challenges FY 2016 was disappointing. Page 2 of 22

3 Putting this year behind us, I am extremely confident in the state of our business. Our pipeline and backlog are higher than we have ever had so far. In addition, customer satisfaction and associate satisfaction are higher than ever before which gives me confidence that we will deliver accelerated revenue and earnings growth. Core business will grow in double digits while the Design Led Manufacturing or DLM as we will call it in short form will grow at least by 50% next year. Overall, margins will also improve by 150 basis points. While I am cognizant of the disappointing performance in financial year 2016, I am confident more than ever that we will deliver better than our historical earnings growth in the coming year. Let me take you over the financial highlight for FY The revenue was up by 13% YoY at 3095 Crores a growth of 10% in constant currency and 6% in dollar terms at 472 million. The operating profit at Crores is up by 6% YoY. The operating margin is at 13.7%. The net profit at Crores, the net profit excluding one-off item is Crores. Strong cash flow generation is something which I would like to highlight in which is about Crores excluding Rangsons and the days sales outstanding is the lowest ever at 79 days. Tax rate is also at the lowest at 23.9%. We had highest ever cash balances in our bank which is at about 774 Crores despite four acquisitions and increased payout in the last two years. The total payouts of dividend are Rs.7 per share. This has already been paid and no final dividend and dividend payout at 30% of our profit continues to be consistent for the last two years. In terms of business highlights we acquired the aerospace aftermarket services of Pratt & Whitney Singapore, which is GSE Asia in Q2 FY2016 recognized by Pratt & Whitney as their most innovative supplier for 2015 for the third consecutive year. Recognized as the Best Tech Brand by Economic Times for the year 2015, in the IT and Engineering Services subcategory. Onsite delivery center in Australia was established to further strengthen the communication vertical. We added 91 new clients during the year, 43 in Data Network & Operation DNO and 39 in Engineering and 9 in Product Realization. For the quarter four, the financial highlights were Q4 FY 2016 revenue stood at 815 Crores up by 4.4% quarter-on-quarter. Revenue is up by 2.6% quarter-on-quarter in constant currency growth in service business on the back of engineering growth, which is at 2.9% as well as product realization business. 14% growth in free cash flow excluding Rangsons we generated something like 90.9 Crores, which is 73% our EBITDA and the days outstanding were also at 79 days, which has been lowest in the history of the company so far. Operating profit was at Crores, which is 13% operating margin for the quarter. The net profit in Q4 was 65.9 Crores. The net profit excluding one off stands at 84.3 Crores. The Europe, Middle East, Africa and India posted a robust growth of approximately 11% quarteron-quarter on constant currency basis. APAC posted a robust 9% quarter-on-quarter on constant currency basis. Engineering business grew by 2.9% quarter-on-quarter and DNO business grew by 1.1% quarter-on-quarter on constant currency basis. Briefly in terms of the business highlights Cyient has been appraised at maturity moderate level 5 that is CMMI Level 5 DEV 1.3 for the Page 3 of 22

4 full cycle, software development processes. This enhances the defense-offset opportunity for Cyient in services. Cyient has further expanded its delivery centers in India. We opened a new one in Warangal in Telangana with a capacity of 1000 team. For strategic and geographic growth, Cyient has entered into a strategic alliance with optimal design solutions, which provides access to Cyient on an ongoing broadband expansion Australia telecom market and penetration into top clients within the segment. With strategic partner in Israel to further augment the existing presence, MOU has been signed with the partner and 22 customers have been added during the quarter, 11 in DNO, nine in Engineering and two in product realization. With this, I would like to hand over the call to Ajay, who will then take you through the detailed financial performance for the quarter and the year. Thank you for your patient hearing. Ajay Agarwal: Thank you, Mohan. Let me take you quickly through the financial results, which the Chairman has already highlighted. Let me just give a little color to it. We have really taken an exit in this particular year with a very strong quarter four. We have $121 million as revenue. I think most of the segments we have seen a very significant growth. We have in engineering about 3% constant currency growth. DNO, if we exclude Softential, has seen about 9% growth. In our Rangsons business, we have about 14% growth. The only challenge we had here was some software sale in Softential business has not come. If we include that, then we are seeing some kind of a degrowth in DNO and which is leading to a lower number of 2.6% constant currency growth. If you look at our core business, if we just look at, if we had done a normal that software deal of Softential also, we would have reached something like 6% growth on our core business, which is Engineering and DNO. I think it would have been an extremely good quarter for us and as such, we are confident that going forward, we have a good revenue base, Asia Pacific, Europe are close to 8%, 10% growth, North America has been impacted mainly by the Softential. So a strong quarter in quarter four. In terms of the profitability, if you look at let us first go through the quarter. In the quarter, let me take a few minutes to explain. There have been lot of one-off which happened both at operating margin level as well as net profit level and that is why you are seeing that our margin for the year is much better than the quarter. So in terms of quarter four, we did a margin of 13% as compared to 14.1%, but if you see this Softential where we have been tracking at if you look at the seven quarters of our performance, we have been tracking at average 20% margin, this time we had a negative margin. So that was really low and compared to the previous quarter, we had a blip of about 150 basis points and Rangsons share going up also had some impact. So, on the core side, if you see, we really had a good margin, which could have been again 14.5% or so, some of it taken away because of Rangsons which is a lower margin business, about 25 bps and 150 bps. So, we feel both of these are reversible over the next year. We had the revenue coming more at onsite this quarter so Page 4 of 22

5 whatever was the benefit of having the gain on the higher billing days got offset by the increase in onsite.overall, our off-shoring percentage is about 43% for this particular year which we are planning to improve marginally in the next year, and Krishna will talk more about it. On the net profit, I would like to explain, we have some one-offs of about 184 million or 18.4 Crores. The biggest of them is in terms of the bonus. Let me just explain. As you are aware, in this particular quarter, around January, government had come out with a circular where they had increased the threshold levels for the Payment of Bonus Act and also they had increased the amount of bonus to be paid, and that was effective from April 1, We had filed a writ petition in High Court. We had also examined with various experts and finally, we provided on a conservative basis for a liability of INR 87 million towards the Payment of Bonus Act. Let me also explain why probably, in our case, this liability is higher than the other companies. Most of the other companies in terms of their salary for the people who are above the threshold salary for the bonus were given something called ex-gratia in lieu of business. Whereas in our quest for restructuring the salaries, we had created my basket of allowance, which were more tax friendly and we had removed a component called ex-gratia. We have been paying PLIs and other things. So still we are examining what is the right way of dealing with this bonus because in spirit, we were on the right side, but as a conservative measure, we have provided for it, but till this is clarified, we will accordingly take the view on the payment. For , we already got the stay from the High Court and lot of judgments is already there from other High Courts. So we have taken a contingent liability. Another one-off which was there is, we have restated the depreciation, where we were keeping 5% salvage value for certain category of assets, that we have un-winded. So this is only one time for whatever was the total value of the net assets in the books and so this INR 56 million is one-off. This will not repeat in any of the years and any of the quarters. Also, you have seen in the last three quarters, we had gained on account of foreign exchange in the last three quarters and also our spot rate, I will talk about it more, is more 70 plus for the next year, and we do not expect in any of the quarters at current spot rate of 66, we should have any foreign exchange losses, but this quarter, we did get affected to the extent of 41 million because of the foreign exchange movement below the operating margin. So these three one-offs had a significant impact. If you exclude those, that is why we have given the numbers with and without one-offs, then the drop in net profit would have been much lower and as I said, so the quarter four is good exit from revenue perspective. On margin and profit, you have to really look at some of these one-offs, Softential change and the business mix change and accordingly, I think we are confident that the margin and profit also is going to have a different direction as we move forward into the next year. This is in terms of the full year. So, same thing if I say for the full year, we have clocked 13.7% as the margin for the full year, but if you look at the core business, excluding Softential and Page 5 of 22

6 Rangsons, we are at about 15.5% margin this year. We have been doing 20% plus margin on Softential in past, this year we did something like 5% and that was mainly because of the change in business mix. We had lot of one-off final retention bonuses, which were only carried forward for this year. Even a swing of half a million dollar in Softential makes so much difference on their profitability, so for a business which was 20% margin, we have ended up at 5% margin. Hence, that is giving us a swing of about 100 basis points on the year and for the quarter 150 basis points. Rangsons has taken away about 65 to 70 basis points and we do have plans for improvement for the next year. So that is why, when we look at 13.7%, at core, we are at 15.5%. Softential we are confident of taking it back to 20% plus levels, DLM we have a lot of improvements that are going to take place in terms of volume absorption and the mix of business. So there also we should improve. So we are confident we should be able to see a much better margin in the coming year and Krishna will give more color to it. In terms of net profit, yes, let me make just one comment. Yes, this has been a disappointing year from the perspective of net profit, while on the operating profit, we did improve and we have added to the operating profit from 401 Crores to 424 Crores net-net, the operating profit has gone up, but on account of various other things, lower treasury income, higher depreciation, lower other incomes, our net-net, our net profit has not grown, but we are very confident going forward this should be a one-off year. If you see in the last five years, our earnings growth and net profit growth has been above 15%, 16%. We are very confident that trajectory should be back. In terms of working capital management, Chairman already talked about it. We have a cash position of 7747 million or about $120 million. This is after paying for four acquisitions in the last 20 months or so. So, it's a good cash position. We have generated the highest ever-free cash flow, highest ever conversion from EBITDA to free cash flow. So that way, it has been a good year. On Rangsons also, we had a positive free cash flow in this quarter and that trend is likely to continue. In terms of days sales outstanding, if you see, we have been moving from a level of 85 days to 90 days, we are moving towards 80 days to 85 days and we still feel we can sustain it and further improve it to a bucket called 75 days to 80 days. That is what we will try to do for the next year and billed DSO is remarkably improved to about 60 days. In terms of our hedge book, first a disclosure, no change in our foreign exchange policy. We continue to be at 70% of the net inflows for the next 12 months. In terms of our total hedge book, you are seeing the numbers on the screen, what is our total hedge book in various currencies. It all totals to about $113 million. If you look at the current spot rate of 66 and our forward position of 70 and look at the mix of those currencies, roughly we should have a gain of about $6 million. So I think the other income where we did in financial year 2015 and some of it in 2016, if the forward rates continue, at the current position, we should really get some handsome other income. Otherwise, if we do not get here and if rupee hits to 70, we should definitely get the gain on the operating margin. So, I think from the currency front, at a net profit level, we are really placed very well. This is our position of the hedge book. On the other income, as you see the cash Page 6 of 22

7 is showing up into the increased treasury income. We already talked about, we had an adverse impact in this quarter, but as I said, that was an one-off, that is what is about the other income. Product Realization business, one of the best quarters. After our acquisitions, highest-ever sale, highest-ever profit and highest-ever cash and they have broken even in terms of profit and cash. So we did $12 million of revenue. There is a very good order book, which is available, which is about between $35 and $40 million is the order book, which is available to us. And in terms of gross margin also, good quarter. Operating margin about 5%, this is despite the fact if you look at the legacy Rangsons business, we had talked about 8% to 10% margin. The legacy business, we did have a margin of about 7.5%, 8%, but we have made investments to the extent of 3% for long term, which will pay us, for the long-term case of Rangsons, that is why you are looking at a number called 5%. Those are the comments on Rangsons. With this, I will hand over to Krishna to talk about other things and also about how the next year looks like. Thank you, Ajay and what I will do is I will quickly on the M&A slide, I will just make a comment saying that there is nothing significant that happened in Q4 obviously and while the pipeline remains to be quite robust and we will see some traction, it most likely would not happen in Q1. We will see some things on this latter half of the year, but I will hold off on commenting too much due to the paucity. I do want to say just to substantiate what Ajay has already taken us through is, needless to say 2016 was a difficult year for us. While the headline number is that we will have grown in terms of dollars, we would have grown about 6%, in constant currency. The core business in constant currency still grew about 4% to 5%. Obviously, needless to say, it s not the most impressive of years or neither our best year. So what I will say is there are some interesting things in our business right now and I am quite confident about how this year which is FY2017 looks like, but one of the things in our business is that it is going to be a little bit volatile, especially because of Rangsons nature of business and like the Chairman said, we will refer to Rangsons as DLM or Design Led Manufacturing business. The volatility is something that we will have to deal with. I think it is something that were are also well positioned to deal with and we will make sure that we are transparently and honestly communicating to all the stakeholders including obviously our investors on how that affects us looking forward, and to give you a good understanding of how that volatility will happen going forward. One of the key concerns in past was on just how our core business performed. I think I am very happy that at least in Q4, it has come back quite strongly. We did have a challenge of course in Softential.If we take away Softential, the growth was roughly 4% or so in our traditional Engineering and DNO businesses. We will continue to work on these growth levels into the foreseeable future based on the forecast that we have right now. So the good news is again the core business is back on a growth trajectory. We will have some volatility especially for two reasons; one is because of DLM, and the second is because of Page 7 of 22

8 software sales in the Service Management business, both of which we will transparently communicate. The key for us therefore, given that there is stability or there is good traction in the core businesses is, the differentiation will come from really executing our strategy in a differentiated manner and that ties into the first of the business highlights, that is, we have reorganized ourselves into eight business units. There are seven industry-focused business units and the eighth is Design Led Manufacturing, which is all our Product Realization and Rangsons. And the intend behind that is these eight industry units are really going to execute the strategy that will ensure that we hit our 2020 aspirations and tie into our S3 strategy. I will talk about that a little bit more in the next slide. Our Chairman, Mr. Mohan Reddy was awarded the HMA Lifetime Award this year. Like I already said, the Rangsons and Product Realization business will be called DLM. The intent here is to drive design thinking and design led manufacturing, which we believe will significantly differentiate us and increase our competitiveness in the global market. We have got two awards; the first is the Supplier of the Year Award from Boeing. This is the third in five years. Boeing has roughly suppliers and we were one of the 12 that were accorded this privilege. ABB also gave us the Best Supplier Award for all round performance for the work that we do. The new engineering center in Prague has opened this quarter. We have some billing that went out this quarter and obviously that will grow going forward. Similarly, we have extended our Sydney facility from 80 people to 160 people, that is driving the growth in some of the APAC telecom businesses and also we have opened a new center in Warangal which is about 150 kilometers from Hyderabad to do some specific work and leverage the cost and capacity benefits that we get from that particular place. Just going into the next slide, the business like I said is reorganized into the eight BUs. The one I will quickly highlight is Anand Parameswaran whom you are familiar with as the Senior VP of Corporate HR, he will move into the leadership role for the Aerospace & Defense business unit. A new leader for Corporate HR has been identified and will join us in about 10 days or so Having said that, I will just give you some colour on the business looking ahead, and I will do this in the context of the eight business units that we are organized as. On Aerospace & Defense 2016 or FY2017 is expected to be quite good actually for the civil aerospace, there is a lot of deliveries that are going out, there is a lot of new aircrafts that are being delivered. What that means is that, about 40% of the aerospace work that we do is really connected to the manufacturing, repair, maintenance, overhaul so that continues to be quite good for us. And also, what we see is our largest customer, no secret there, Pratt & Whitney, will continue to grow quite robustly. That will drive the overall Aerospace growth, but all said and done, we see some good growth going there. Page 8 of 22

9 The second business unit that we were organized is Industrial, Energy and Natural Resources. This is the work that we do for off-highway companies, industrial companies, energy, power equipment companies and natural resources or mining etc. That is of course going to continue to remain to be a tough market for us. Oil and gas will remain oversupplied through 2016, mining is slow and it will continue to be that. We are focused on some new and emerging areas there such as electronics and software, but for the year, we expect that this will be quite muted. Rail Transportation will be predominantly driven by newer infrastructure projects. There is also good growth for us because of the newer things that are going on in our business. This is one area where the Design Led Manufacturing has a very strong value proposition. Similarly Prague is coming along. So overall, the market is quite strong and our proposition to the market remains very strong. Medical Technology and Healthcare is a nascent industry for us. We have put in a lot of effort over the last six months. Brian Wyatt, who some of you would have interacted in his role as the Senior VP of Corporate Marketing and Business Development, has moved into this role. We do see really good opportunities because we are working with three out of five largest OEMs in this space already over the last year or so when we were really focused on it, and while it is a small number, it is a big growth number that we are targeting here. The Semiconductor business will grow modestly this year, some of the problems that we had in this particular area where also very specific to us. Our largest customer, which was IBM Microelectronics, was getting acquired by Global Foundries, all that is done. We see very good growth and I think last time I reported back that we started getting new purchase orders from the new owners. So that was a good starting point for us and I believe strongly that this will continue to perform well. We have also added two or three new client and these are some of the largest semiconductor companies in the world. So there is some good growth opportunity there. Utilities and Geospatial, the pipeline is very strong in North America. We have had some issues in Q3 specifically which continued into Q4, it was just a delayed project start in one of our very large North America clients in utility, but the project start has happened and we will see this industry actually do quite well for the rest of the year. It is also one of the double-digit growths at least. In terms of Communications, APAC is leading our story into communications. One of the telecom clients in APAC is now our third largest client overall, but the growth potential again is very significant. Australia, for example, is spending a lot of money on broadband rollout and we are the key design supplier to the EPCs that are actually executing this rollout. So, the one area of slight concern here obviously continues to be the Service Management & Assurance or the old Softential business, but we believe that we have also achieved some good pipeline over there, which will help us manage some of the volatility, but I will leave that aside for a second here. Page 9 of 22

10 Design Led Manufacturing again is looking good. Q4, like Ajay just reported, has been the best quarter that we have ever had. We had a growth quarter-on-quarter for four quarters now over there and as I said multiple times, this is the key core part of our strategy and how we will win. I am very confident on how FY2017 will turn out. So, what all this means, and if I can just take a minute to talk about what the outcome will be or what I believe the outcome will be, revenue growth, the core business will grow at double digits. Now double digits can mean anything from 10 to 99, but from prudence perspective I will commit to the lower end or the lowest end of that double-digit range, but that is really what we are looking at in terms of the core business. DLM will grow at least 50%. I do want to say that in Q1, we will have a slight degrowth in the DLM business, but that is absolutely anticipated. I am 100% committed that we will do at least 50% growth in DLM during the course of this year. I am saying that because; for example, if you look at it, we would have done approximately $39 million of revenue in for the year and roughly that amount is already there in the backlog, plus there is another $15 million of committed revenue, so that itself gives us confidence that we are almost at 50% just from a backlog perspective. So I am committed to making sure that that happens. The top client and new area growth or in that, I would say, to me, one of the key areas is account mining and when we did our budget and when I am making this commitment of at least a doubledigit growth in the core business, that is also basis that our top clients will grow at those numbers because there is a very strong correlation in our case between what happens in the top 20 and what happens in the overall company. So it is a little bit easier also to forecast the top 20 growth. New areas, there are three new areas that personally to me are quite important, Design Led Manufacturing, Medical and Healthcare and the Analytics business and we see some really good growth opportunities here in these three areas and of course, the execution of S3. Again, while I earlier said I am very happy that the core business has come down to the core business has again come to growth the real differentiation for Cyient is really executing our strategy. So that is something that we are absolutely committed to and going to focus on getting done. There continue to be some good opportunities for margin improvement. Like the Chairman said in his commentary, the core business margin even this year increased by 100 or so basis points. But having said that, I think there are still some very good opportunities and some of them are listed there to give you a sense of what we are focused on. But net-net, EPS will grow at least by 15%, that is what we believe will happen at a minimum for this year. Just some key risks and I will just come back to two things. While the top two are really macroeconomic risks where we have little control on, the third thing is really a reality that is wage inflation will happen and we are working on controlling it. But the two risks that we really will manage towards making sure that the growth in the core business continues and sticks and again I am confident to commit to the numbers and the acquisition especially with DLM continue their performance. These are the two things that will really determine how the year pans out. But having said that, I will summarize it by saying that, look, FY2016 was not our highlight, but I am Page 10 of 22

11 very confident in the business going forward the growth will come back. We see some really strong opportunities and possibilities in front of us both to improve our margins, but also more important our revenue growth. Thank you for your support in FY2016 and we are really looking forward to FY2017. We are quite excited about what the year holds for us. With that, I will turn it back for any questions. Moderator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. We will take the first question from the line of Sandeep Muthangi from IIFL. Please go ahead. Sandeep Muthangi: Thanks for taking my question. Krishna, I had a question on the outlook/guidance. Can you give us a little more colour into the core business growth that you have highlighted, and is it x Softential business and also, in terms of the uptick of the business, are we looking at more a front-ended growth or are you expecting some deals to close towards the second half of FY2017? Sandeep, the 10% number we talked about is including Softential. That is all inclusive. So, its x DLM I would say. That's basically the number and DLM is at least at a 50% number. Sandeep Muthangi: Right. And in terms of the growth pattern, are you looking at a front-ended growth uptick happening pretty soon or are you waiting for a few deals to close? No. So, in DLM, the growth will be Q2 onwards because, like I said, there is just deals have closed. It is just that when the delivery start is in Q2. So, in DLM, it will be a little bit more backended, but in terms of the core business, it is fairly flat. It is not that we have say 6% or 8% quarter somewhere in the middle. It will be, if just mathematically we need to do to hit a 10% number for the year, we need to do roughly 3% quarter-on-quarter 3%, 3.5%, will be around that range through the year. Q2 will be a little bit better than the other three quarters, but will be within range for the year. Sandeep Muthangi: Okay great and on the visibility front, as you said, you have highlighted the visibility on the Rangsons part of the business, you have a backlog, you have an order book, just have to execute that. What about it on the core business side? Is the visibility high or is it 60% and you're waiting for some deals to close, how good is visibility? Visibility is better than that because I think one of the things we have learned is the lead-time in our business is quite significant. So the visibility is quite good. If I look at the revenue visibility, it is almost about 80% to 85% of that will be either basis backlog or basis a firm commitment. So if you look at the Q1 number, it will be pretty much 99.5% will be basis backlog or a firm commitment and then it sort of goes down a little bit over the year. So, again, it is not that a number of deals have to close and that is just how it works, but the number is basis, the visibility that we have not basis an assumption that an inordinate number of deals will actually close. Sandeep Muthangi: Thanks. That is really helpful. All the best for the year ahead. Page 11 of 22

12 Moderator: Thank you. We will take the next question from the line of Sagar Lele from Motilal Oswal Securities. Please go ahead. Sagar Lele: Thanks for the opportunity. Just one question on the organization structure, this is the second time we are seeing a change in this. Could you just highlight what was probably some of the gaps that you saw in the earlier change versus how you will be able to better execute strategy now that you have changed it again? Absolutely. So if you look at the slide and if I were to summarize our strategy in one sentence, it is basically that we are going to deliver end-to-end projects in selected verticals basis a deep domain expertise. So our strategy is really built on expertise and even if you look at historically or even the business right now, our sale is a competence sale and not a capacity or a cost sell. Those are important, but the fundamental thing is, it is a competence-based sale. So once you get into a competence-based sale, it is quite important that you have to build competence in the industries that you are addressing. So that being the case and you are right that there was a reorg about two years ago, and it was done with a very specific purpose, we were running up against some challenges in terms of revenue and how we were managing customers, I think FY2015 specially we got over a lot of them. It was a great year for us obviously was a little bit slower, but I think what we believe in this, to really make this competence based sale, we have to be organized around the industries in which we want to build the competence and that is where this structure just helps us a lot better in two things. One is strategy from a longer-term perspective, but also accountability from a shorter-term perspective because what used to happen in the old structure is every number had two owners, right, and the only single point of failure was me whereas now, there is a lot more ownership around the number. Sagar Lele: Right, that was helpful. Also you have seen a strong onsite growth in this quarter. Now onsite constitutes to about 59% of total revenues. What could you give us some colour in terms of what projects are driving it and how much of these ramp-ups will continue and also, if you are expecting the North American utility project to start ramping up from the next quarter, that also should be more onsite driven. So how will offshoring as a margin lever pan out through the rest of the year? So, on offshoring, we are not expecting too much offshoring through the course of the year. I mean, it will improve a little bit, because right now, at about 40% offshore, that is quite low. I mean, again, it would not go to 50% say it will get a little bit better. We are probably looking at a couple of hundred basis points improvement in offshore. So, what we have realized is the reality of our business is going to be a little bit more onsite because there are projects in Aerospace where you have to be onsite because a lot of it has manufacturing, engineering or process planning where you actually need to be close to the actual production facility or repair engineering where you have to be close to the repair facility or it is telecom where a lot of the work involves some deep knowledge of local regulations, local geography, local courts, etc., or there is also because the telecom networks will also include sensitive defense establishments, the work has to be done in that country. So, when we say that the EPS growth will be 15% and you Page 12 of 22

13 can work backwards a little bit on how operating margin etc., will change, that is basis the mix would not change dramatically. Having said that, I will say that a lot of the onsite business is project-based business, being executed in our delivery centers, it is not staff augment. So, we have a lot of leverage on how to manage that business efficiently. Sagar Lele: Thanks, Krishna. I will get back in the queue. Ajay Agarwal: Let me just add a comment to that, I think another thing that we doing along with the reorg, I think our focus is going to be more on driving the operating profit and the gross profit by customer for each account manager and for each industry and each P&L owner. So, even if we get more dollars of profit from onsite and if that is the reality, we are going to hold ourselves accountable to what operating profit we are committing to ourselves for each of the industries, and thereby whether the work comes at onsite or offshore, we are going to make sure we get to that 15% plus earnings from wherever it comes. Sagar Lele: Sure. That is helpful. Thanks, Ajay. Moderator: Thank you. We will take the next question from the line of Mohit Jain from Anand Rathi. Please go ahead. One is on your utilization for engineering service line. I thought there was a big dip in this quarter, but headcount remained flat and you also delivered revenue growth. So what was the reason for that? So, actually you should not read too much into the dip between the quarters. I think there has been a restatement and in the investor update we have clarified. So the number if you see for the exit quarter is the correct number and there was a readjustment for the previous quarter. So if you see more or less engineering is flat and the way I look at it is, basically, we have a good opportunity for improvement in utilization in the next year. Let us put it this way, in engineering, we really have if the exit utilization is 66% and in offshore, our focus is going to be to improve the operating profit that is a really good lever both on pyramid corrections, span of control and improving the efficiencies. Let us put it this way, in engineering, if the exit utilization is 66% and there is lower offshore, our focus is going to be to improve the operating profit, that is a really good lever both on pyramid corrections, span of control and improving the efficiencies. So I think that is how we are going to look at it and do not too much worry about the numbers, I think we are going to look at the costs. Okay. And second, is there or was there any goodwill write-off in this particular quarter? Yes, there was a goodwill write-off of about Rs.6 Crores on account of merger of IGIL, so as we had already informed, last year, we had made an application to the High Court for merger of IGIL which was the 100% subsidiary of the Company and that merger has been approved and this quarter, that write-off about Rs.6 Crores has taken place. It is an intersegment P&L, there is no major topline or bottomline on that, just for the benefit of everyone. Page 13 of 22

14 This was directly from the balance sheet or this? Directly to the balance sheet. And why That was the accounting standards. So that's all. Rs.6 Crores is the total amount. Exactly. And why there is this D&A policy, Depreciation policy change suddenly from 95 to 100. Is there any, I mean, this is just a discretionary decision or was there some ruling which resulted into this? So actually, what has happened is, it is not discretionary. We were taking, so it is the other way around actually. What we have done is, we were assuming in case of software that we will have 5% residual value, so across class of assets, we had kept 5% of residual value. We reassessed and it came out in our own internal audit, to be honest with you, where they said why for software, you can get the residual value. So, we said that is a fair point. We discussed with our auditors also and we said for software we are not taking the residual value. So, whatever has to be there has to be fully provided. So, it is only one-time hit, it was triggered by a mistake that we had done, and that is what we provided. But your DNO charge will go up by that amount for next year because? No. No? No. So, all the software historically which is there in terms of next to these assets whatever was the corresponding depreciation totaling to that residual value of 5% has been completely written off. Understood. Second one was related to your guidance on margins because last year also I think there was this guidance of, I am talking about core business ex-rangsons. This guidance of 125 BPS to 150 BPS improvement in margins, we actually ended up flattish kind of on a Y-o-Y basis. I am comparing FY2016 with FY2015, again, looking for a margin improvement. And this was despite exchange rate moving from Rs.62 to Rs.67 during the course of the year. So my question is, what are the risks to the current guidance and what went wrong last year because of which we couldn't deliver on the margin guidance? Page 14 of 22

15 So, as you said, one is we did get benefit of exchange rate but I think exchange rate really moved from Rs.62 to Rs.67. So, it was a, obviously, we could get. But what I want to say is, look, if you look at just the core business, I mean, even remove the Softential piece, we did deliver 100 basis points some improvement in margin between FY2016 and FY2015. So that was there, obviously, aided somewhat by currency, but we also lost some in currency because Australian dollar depreciated, pound depreciated quite significantly but anyway, we will say that it was 100 basis point improvement because of that. We have had some cyclicality issues in Softential that took it away. Actually, it is a little bit of a point in time thing in the sense that if Q4 in Softential and the deal that we were expecting to happen happened, then we would have actually delivered some decent margin growth also on top of what has happened. So that being the case, there are just some operational initiatives that we continue to focus on which includes the pyramids, there is some obstacles there, salary increases obviously will be there but I think we're going to be a lot smarter about how we do it and how we manage it. There is just better SG&A because one of the things that I have been saying is the overhead that we have are for a much larger business. We will not add any significant overheads in spite of the growth at least for the next two years. So the indirect cost absorption will come in quite a bit. So, all this put together gives me the confidence that even leave DLM aside or the Rangsons/DLM aside, we will see some decent improvement in margin. So last one is on Softential. So what went wrong there and why the margins dipped so sharply in this? Is it like purely because license sales or something or your costs have gone up? No, costs are the same. It is just license. Last quarter. Last quarter is licensing. Can I make a comment? Sure. So one is from the cost perspective, yes, there was a one-off cost in this particular quarter and this particular year, as there were some retention bonuses, some sales commissions pertaining to certain old commitments and all that, that were paid, that was about $0.5 million. So that was a one-off cost. Second was the lower absorption. If you see our average rate in the last seven quarters after acquisition has been more like $4.5 million of volume, whereas this year, we have done less than $4 million and especially in this quarter, so that lower absorption also has impacted. And third one is the mix of the business, where the mix of business which has come is also impacting the margin, both in terms of those sale of, it is not license, it is a software sale which is high margin plus it brings the maintenance profit with it. So I think all three of them have come at the same time, some one-off costs which are not likely to continue, lower volumes leading to the absorption issue and third one is in terms of the mix of the business, but as we looked at the next year, we are very confident that both in terms of our run rate of restoring and Page 15 of 22

16 going back to above that $4.5 million at least on a yearly basis, there is going to be cyclicality quarter-on-quarter and also going towards that 20% margin, we will get it. Just one more comment, if I may make, I think to your point about core business, if you take out the impact of Softential and Rangsons from the 14.7% to 13.7%, we have dropped about 100 basis points between the two periods, but if you take out the impact of Softential and Rangsons, on core business, we have improved the margin by 100 basis points, but that is a fair point that exchange rate has also helped. Right. So your revenue for Softential last year was $18 million. This year, how much would it be? So the last year revenue was about, Last year, I mean, FY2015. FY2015, our revenue was $23 million. This year, the revenue is about $15.5 million, $16 million. That is the kind of drop we have looked at. And what would be the EBITDA here, EBITDA margin? Margin is, it was 30% plus in last year and this year it is 5%. Okay. And is this is a lost deal, lost revenue or do you think it can come back in first quarter or second quarter? No, I think its lost revenue. I think it is, we are rebuilding the business back to about the $20 million or so business next year. So there is a little bit of an effort that we need to put in to rebuild it. So I would say, the services business continues, that is about $3 million or so of revenue. So that is a $12 million business, that is going well, that continues which is really what we bought the business for. So, that is going quite well. It is this additions, which are the software sales that really provide us the additional revenue is where we need to rebuild it a little bit, but again, I would say pipeline is where it needs to be. So, I am not too worried about that going forward. Is it like you are targeting $20 million back next year? Yes. Understood. Thank you and all the best. Moderator: Thank you. We will take the next question from the line of Madhu Babu from Centrum Broking. Please go ahead. Page 16 of 22

17 Madhu Babu: What would be the quantum of Wage hikes and what would be the impact on margin? I mean, next quarter, how the margins are going to be for 1Q FY2017? See, wage hike, we are honestly still working through it. We have made an assumption that the impact will be about 200 basis points, but we are working through exactly what going to roll them out which we will finalize that in the next few weeks, but we will minimize it as much as possible. That's all I can say. We obviously want to be cognizant of the fact that we are already at about 13% margin and it can't go much below that. Madhu Babu: The other one is on the hiring. I mean, if you see, year-on-year headcount has only increased marginally this year? Correct. Madhu Babu: So next year would there be incremental hiring and how that would act as a margin headwind? Anand, you want to answer? Anand P: For this year, our net additions have been just over 300 people. And in terms of our plans for next year, we are really looking at adding somewhere between 500 people and 700 people. Now this is not exactly in line with the growth. That is because we do have quite a bit of leverage that we have in terms of improving utilization as well as productivity. So, we are looking to deploy those levers for improving operational efficiency, but that sort of the numbers that we are looking at, an overall net addition of somewhere around the 700 people range. Some of the net additions in the last year, if I may add, Anand, also has been impacted by the fact that the increase in the revenue has been more at onsite. So, if you look at the revenue coming from this thing, that is why the number of people needed has been much less plus we had in the quarter one of last year, some pyramid correction along with the wage hike. So net-net, 300 is taking into account all these. Madhu Babu: Sir, on the acquisition strategy, I mean, both the acquisitions have not turned out well on the revenues, Softential as well as Rangsons. So would we be more cautious on doing some largescale next acquisition in the next year? No, I think, it seems both of them are, while in a short period of time here we do have a little bit of a challenge, but I am very committed to the long-term strategy and I think both of them are great enablers of that strategy. We definitely sort of live and learn, we will be more prudent on how we set the synergy case and how we set expectations, how we manage it initially, but I would not slow down on, while it definitely offers up lessons to be learned and be cautious, it does not change the fundamental premise that there is some good businesses out there that will really help us accelerate our growth and deliver better results, so yes, it is a lesson learned to me, but it does not make me any less shy. Page 17 of 22

18 Madhu Babu: Thanks a lot. If I may just add, I think one more thing which is there, which gives us this confidence is that both of them were entrepreneur-driven businesses and definitely it took us more time to get on top of them in terms of our own management teams; for example, in Rangsons, if you see the team which has been built over the last six months to nine months, they are on top of business that has shown up in the right trends. In Softential also, we had a change of guard, which happened in H1 of the current, of the last year, financial year 2016 and all those gaps were filled. We have a new delivery head, we have a new sales head, we have a very good sales team. Of course, they are still taking grip of the situation. They have not been able to convert into the software orders, but I think that team is also there in both the acquisitions on the ground, which is integrated with Cyient now. So that was another thing, which gives us, confidence, the management team of Cyient being there in both these place now. Madhu Babu: Sir, one more last question, if I may, just on the new structure which is in place. So if you see last four years, there has been quite some volatility and patchiness in the growth. So with the new structure in place, I mean, could we be on a more predictable yearly growth path like a typical services kind of company because? Yes, absolutely. So what I will say is that we definitely want to get more predictable, right, I mean it might not just be a quarter-on-quarter growth because the reality of our business and our strategy is not premised on a quarter-on-quarter growth kind of a business. It is premised on doing some large projects but there will be volatility be it in design or in more importantly, in manufacturing, etc., so what I can say is, we will definitely get more predictability, and absolutely, we pride ourselves in the transparency and that will continue to tell you what it is but predictability sometimes might also not necessarily mean every quarter we'll grow at an x percent, it might just be like I am saying, on Rangsons while we have had the best quarter and I am committing to a 50% increase for next year, Q1 will see a slight decrease, and that is just the reality of how the business is and what we working towards. Madhu Babu: Thanks a lot. Moderator: Thank you. We will take the next question from the line of Ashish Chopra from Motilal Oswal Securities. Ashish Chopra: Thanks for the opportunity. Krishna, just wanted to know in terms of Softential, so what is really driving this whole rebuild exercise in the software sales part or the license sales part, if you could just throw some light on that? It is just the nature of the business, Ashish. I think the key is software sales are a little bit lumpy. We have been managing them as best as we can. It is just that every quarter we are making sure that the right deals come through. This quarter, we did not find the right deal or we did not want to accelerate a deal which was not the correct deal for us. So it is just that the nature of the business. Page 18 of 22

19 It is again, we always struggle a little bit with that part because the services is a great business. It delivers $12 million or $3 million a quarter like clockwork, but it is just the lumpiness of the software businesses is something that is new a little bit and we have to just manage through it. So again, it is nothing to be concerned about because there are other deals, the deals are coming back. We see some very large deals again in the pipeline, it is just that the nature of the business. Ashish Chopra: If I look at the margins on Softential, just wanted to know if these margin from 5% can go up in the absence of software sales or would it be completely dependent on this excess rebuilding and hence margins will also be completely correlated to that kind of an improvement or pure services in this margin can also increase from here? No, I think, it is a combination of both. I think it will be a mix of the services business and the software business because software also, and the reason why I say we look for the right deals etc., is selling that software then gives us the right to actually do the service on top of it. So, it is a little bit important also from that perspective, but again I will say I am quite confident that the margin will come back to at least a 15% level, I mean, even put aside the 20% level for a minute because the pipeline is there for software and I would be, over a period of time, if we do not sell the right software and build the right upfront relationship, that can create another challenge for us. Therefore, it is a mix that we have to work towards. Ashish Chopra: On the overall margins front, just wanted to understand, so when you are guiding for 150 basis points of expansion, would it be possible for you to break it between what is the expansion that you are seeing in the core business vis-à-vis the expansion that you would be modeling in Rangsons next year? I think that detail we cannot share that right now at least, and we can do it either offline or we can do it at the Investor Day, we'll give you a little bit more insight. Again, we obviously can't give you the exact numbers on where and how, but we will give you an insight of how it builds up. Ashish Chopra: Just lastly from my side, so you did mention that there is inherent volatility in the nature of business in the DLM part and in that context, when we look at the 50% growth guidance in the segment, just wanted to understand as to how should we look at it? So is that like the base minimum commitment and then volatility could be maybe on the higher side or should we really taken to cognizance the fact that 50% is your guidance, but this volatility could still probably swing it downwards like we saw in FY2016 as well? So what I will say is that, you have to take into account the quarterly swing. It will be there and I will be as transparent as I can from a quarterly basis. So to me that is, there could always be on the lower side, I will sort of put that caveat, but to me, this is a realistic base case. Again, we have done a lot of work in terms of understanding where the revenue has to come from, what is the pipeline, where are the opportunities, etc. So while there is a downside risk to it and there always is, and then last year was a little bit of a unique year, among many other things Page 19 of 22

20 on how the DLM business worked out last year. It was also our lack of understanding and our lack of experience in that particular type of business. Now we understand it a lot better Even when I say the core business will grow 10% say, it just could mean many, many things. We might end up at a lower number because of XYZ series and so I am using my best judgment in saying that it will grow at 10%. There is always a chance it will go better and I'm obviously once bitten, twice shy, so I am being a little bit conservative. So anyway where I will get to with DLM also if that is the case, this is the baseline case. Putting our judgment into various opportunities, obviously there is an upside or a downside, but I will also very emphatically say that the upside is higher than the downside. Ashish Chopra: Sure. That is very helpful. Thanks and all the best. Moderator: Thank you. We will take the next question from the line of Ravi Menon from Elara Securities. Please go ahead. Ravi Menon: Thank you for the opportunity. Krishna, if I ask you about the long-term prospects of the DLM business, so you were talking about 50% growth but since this is essentially very project-based and short-term contract, how sustainable would that run rate be and what should we expect for medium-term to long-term for that business? Yes, absolutely, Ravi. So, I think the key for us is if we can do this 50% or when we do the 50% growth this year i.e., we grow to whatever say roughly as say $55 million, $60 million business, that actually gives us a lot of credibility or continues to build on the credibility to make sure that we are winning those kind of deals, because if you look at some of the deals that we are actually winning right now, they might only contribute to and I am just, very honestly, I am just choosing a number here, say $10 million with a deal that we won will come this year, but that's also a three-year deal, right. So, the three-year deal is three years, $40 million, there is again a little bit of back-ending there and so on and so forth. So, my expectation and my commitment is while they are project-based businesses, some of the deals that we are also bidding on are large long-term deals. I mean, it is a deal, it is a project, but the project is multiple years, multiple millions of dollars. So, as long as we can do this, get to this $55 million, $60 million number this year, I am quite confident that, that growth will continue. Will it continue at 60%? I can only comment or I will reserve my comments for maybe the Investor Day and through the course of the year, but then I am very, very sure the prospect of that kind of growth is there going into the long term. Ravi Menon: Great. And if may ask a follow-up, how good is the cross selling going on? Have you made any progress there? We have spoken about that the last couple of times. You said that some of the clients had actually evaluated Rangsons' capability and were pretty happy to qualify you as a supplier? Page 20 of 22